choosing which assets to distribute to HCE

[M Norton]

SH 401(k) has assets held in pooled account from inception (1997) - no participant direction.

Plan sponsor has decided to move assets to American Funds platform and allow participant direction beginning 2020.

Some assets in the plan will not transfer to the AF platform and must be liquidated or distributed.  They include a Certificate of Deposit and some corporate bonds.

Two of the three owners are over age 70 1/2 and must take RMDs.  Can they choose which assets are distributed for the RMDs?  And if the plan allows inservice distributions for participants who are NRA (65) or older, can those participants (the HCEs) select which assets can be distributed/rolled over to IRA (after satisfying RMD requirement)?  

There is concern that allowing HCEs to "cherry-pick" assets for distribution might be discriminatory, even though they would be distributed at current market value and there would seem to be no harm to the NHCEs.  (There are no NHCEs who are NRA or older.)

Thanks for any advice with this!

[Bird]

The first question is - does the plan permit in-kind distributions?  If so, in theory, you have to offer such to everyone.

The second question is - why?  What possible reason could there be to not just sell these and move the cash?  I can pretty much guarantee that whatever it is is perception rather than reality.  

[M Norton]

Inservice distributions are available at NRA which is age 65.  No other participants are eligible for inservice.

The HCE would like to roll these investments out to his IRA rather than paying the expense of purchasing them (again), as they will have to be sold if not rolled out because they cannot be transferred to the American Funds platform.

The question being asked is whether it is allowable to transfer them as part of an inservice distribution.

Thanks for the response.

 

[BG5150]

What does the document say?

[Larry Starr]

2 hours ago, M Norton said:

Inservice distributions are available at NRA which is age 65.  No other participants are eligible for inservice.

The HCE would like to roll these investments out to his IRA rather than paying the expense of purchasing them (again), as they will have to be sold if not rolled out because they cannot be transferred to the American Funds platform.

The question being asked is whether it is allowable to transfer them as part of an inservice distribution.

Thanks for the response.

 

Bird responded first, asked you a question, and you did not answer him.  He asked you whether the plan even allows in kind distributions.  My plan DO NOT; it is much too complicated if you have participants because you have to allow those for everyone.  So, find out if the plan even allows them. And if it does, amend it so it doesn't! ? 

[M Norton]

plan document allows for in kind distributions.  When participants all have separate accounts after move to American Funds platform, it will not be an issue.  However in kind is permitted under current document provisions.  There are no other participants who are currently eligible for in-service distributions (available to participants who have attained NRA (age 65).

[Luke Bailey]

This takes me back 30 years.

If plan document permits and your valuations are sound, it should be fine. But make sure you have thought through valuation issues. You mention only CDs and bonds. With any luck, the bonds have daily quotes. The CD's just need to find comparable short-term instruments.

[Bird]

Sounds like it's ok.  But, as Luke Bailey notes, only if you use proper valuations.  If there is a $50K CD and it is paying more than today's current CD rates, then it is worth more than $50K (ignoring accrued interest).  Again, I suspect it is more about perception than reality...they might regret it after they face the hassle of transferring an asset from a retirement plan account to a personal account, especially if you charge them fairly for this research and also manually preparing a 1099-R vs. just doing it thru AF platform.